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Merkley: Use TARP to help underwater homeowners

Merkley's plan could open a new avenue of relief for struggling borrowers. | AP Photo

As of March 31, states had spent just $351 million of the $7.6 billion given to them for approved foreclosure prevention assistance through the Hardest Hit Fund, according to the TARP special inspector general.

In July, Merkley released a proposal aimed at helping “underwater” borrowers nationwide. He suggested that a trust be set up under the FHA, the Federal Home Loan Banks system or the Federal Reserve in order to buy “underwater mortgages” using government bonds so long as the borrower was current on their loan payments.

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The idea is that the homeowner could then refinance their mortgage into a lower rate, something they can’t do if they owe more than their home is worth, and have a better chance of avoiding a foreclosure.

Supporters of the plan say it would also put more money in borrowers’ pockets to spend and help the economy.

When he released his plan, Merkley also suggested that unspent TARP money allocated to the Hardest Hit Fund could be used for pilot programs.

In a letter to Merkley dated Aug. 31, Treasury said it approved of the idea.

“Treasury recognizes that current underwater homeowners whose loans do not have government insurance or a government guarantee have few opportunities to refinance into loans that can lock in today’s historically low interest rates,” according to the letter. “We would be delighted to work closely with any or all (state housing finance agencies) that are interested in developing and implementing pilot programs to assist homeowners through the Hardest Hit Fund.”

Using the unspent money would allow Merkley and the Obama administration to test out the idea before having to deal with the issue of whether legislation is needed to set up the proposed trust.

“It is still unclear if legislation would be needed,” a Merkley aide said.

The Obama administration has been lobbying Congress, unsuccessfully, for months about passing legislation to broaden refinance opportunities for the 10.8 million borrowers who are underwater on their mortgage.

Readers' Comments (7)

No more bailouts period !!!! There is no money in the bank account !!! Don't even consider bailing out the state pension fund of Illinois !!! Stop the spending !!! Bernanke is a criminal and should be arrested for theft along with Timmy Geithner !!!

Many economists are now saying that much more of the rescue money should have been directed at homeowners in the first place, but of course both Bush and Obama were listening too closely to banksters Paulson & Geithner, whose first priority was to prop up the banks.

Helping out homeowners with the leftovers of the bank bailout is a dollar short and a day late, but better late than never. The need is still there, the economy would still benefit.

This would be awesome! And couldn't come soon enough. I am one of the few responsible people who has been been late on a payment but still owe 30k more than what my house is worth. I would be more than content with any program that would apply directly to the principal I have left so the gap wouldn't be as big. But I don't ever see that happening.

The problem with lower payments is that you still owe a lot more on your house than what it's worth. So you are still "under water" on your mortgage for many more years to come. If these programs applied that money directly to the principal of under water mortgages, that would help out the homeowners so much more in the long run. But that will never happen I don't think

The problem is that urban homeowners especially those in "certain zip codes" will again be disinfranchised......you know the ones that have never missed a payment and because of the "credit score" will not be allowed to participate in these programs......

Those Americans that has proved themselves economically accountable and have paid their mortgages even through these difficult economic times....those people.......

@Granny12; i don't see why that would be the case - the refinance would be through the FHA and they have loan rules that are very very flexible. if these people you speak of are current on payments and have income the FHA will approve them.

i personally think this is absolutely necessary to stop the long term bleeding in the real estate market. there are an estimated 12 million households that are current on payments and owe between 120% and 200% of their market value. most of them are people with good credit that have been paying their payments in full and on time, and most are NOT in federally insured loans. They are not in federally insured loans because their credit scores and incomes were so good when they bought in the bubble that the banks fell over themselves to give them good terms. most economists now agree that interest rates and inflation are going to be unavoidably high in the next two years and until around 2016 at least. overall housing prices will have to slide in the next few years because of two things; 1. foreclosures and short sales that were stopped by many of the hardest hit states are now in the system and there is a LOT of them. the home that was not foreclosed has to be valued close to the foreclosed home's price and that is going to further erode housing prices into the next couple of years while they try to erase the backlog of distressed properties. 2. inflation and higher interest rates will mean people can afford to borrow less for a home and will be a major brake on housing prices. so when the inflation hits and these homeowners are evaluating what to do they are going to see the continued deterioration of their homes price, and the futility in trying to pay for it for another 10 -15 years until it finally may break even. if they walk away and let it foreclose they can borrow from the FHA again in as little as 3 years for another home. the new home will cost a lot less and will be bigger and better than the one they're in. that would be 12 million families saying screw it and these families are the families that spend money because they have managed their finances well in the past. but once they walk away they will be renters and will not be spending as much on goods/services. all of this to just say that if the government helps these people out and gets them into an affordable situation it will help the economy a great deal. if the govt doesn't help them they will add to the housing market issues in a big way.